1 Global Supply Chain Management and International Logistics ( PDFDrive )

Global Supply Chain Management and International Logistics The development of international trade is driven by international logistics and manage- ment and the provision of the global supply chain. The ultimate objective of global supply chain management is to link the marketplace, distribution network, manufactur- ing/processing/assembly process and procurement activity in such a way that customers are serviced at a higher level, yet lower cost. Overall, this has introduced a new breed of management in a computer literate environment operating in a global infrastructure. Addressing this complex topic, Alan Branch’s new book fulfills two clear objectives: • to provide a concise, standard work on the subject, written in lucid language that embraces all the ingredients of a notoriously complex subject with a strategic focus; • to extol best practices and focus on all areas of the industrial and consumer sectors and their interface with changing international market needs. Until now, no book dedicated to international logistics and supply chain management was available. Practically oriented, this book features numerous case studies and diagrams from logistic operators. An ideal resource for management students, academics and managers who need a succinct treatment of global operations, Branch’s book skill- fully illustrates his ideas in practice. It is a book which should be on the shelf of every practitioner and student of the subject. Alan E. Branch is an international consultant, lecturer and examiner/moderator. He has lectured widely in the UK and overseas, including visiting lectureships at Cardiff University, Reading University, Plymouth University, Leicester University, London City College and Rennes International School of Business in France.

Also available from Routledge: Elements of Shipping, Eighth Edition, Alan E. Branch. (978–0–415–36286–3) Maritime Economics: Management and Marketing, Alan E. Branch. (978–0–748–73986–8) Books by the same author: Elements of Port Operation and Management Dictionary of English Arabic Shipping/International Trade/Commercial Terms and Abbreviations Multilingual Dictionary of Commercial International Trade and Shipping Terms in English, French, German, Spanish Maritime Economics Management and Marketing Shipping and Air Freight Documentation for Importers and Exporters, 2nd edn International Purchasing and Management Dictionary of Shipping International Business Trade Terms and Abbreviations Export Practice and Management, 5th revised edn Dictionary of Commercial Terms and Abbreviations Elements of Shipping, Eighth Edition

Global Supply Chain Management and International Logistics Professor Alan E. Branch FCIT FIEx FILT International Business/Shipping Consultant Examiner in International Logistics/Global Supply Chain Management/ Shipping/International Marketing/International Purchasing Visiting Lecturer Cardiff University/Reading University/Plymouth University/Leicester University/Rennes International School of Business, France Fellow Chartered Institute of Transport and Fellow Institute of Export

First published 2009 by Routledge 270 Madison Ave, New York, NY 10016 Simultaneously published in the UK by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business This edition published in the Taylor & Francis e-Library, 2008. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2009 Alan E. Branch All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging in Publication Data Branch, Alan E. Global supply chain management and international logistics / Alan E. Branch. – 1st ed. p. cm. Includes index. 1. Business logistics. 2. International trade. 3. Business logistics–Case studies. I. Title. HD38.5.B733 2008 658.7–dc22 ISBN 0-203-88776-X Master e-book ISBN 2008021843 ISBN10: 0–415–39844–4 (hbk) ISBN10: 0–415–39845–2 (pbk) ISBN10: 0–203–88776–X (ebk) ISBN13: 978–0–415–39844–2 (hbk) ISBN13: 978–0–415–39845–9 (pbk) ISBN13: 978–0–203–88776–9 (ebk)

To my grandson Benjamin van Emden



Contents Preface xi Acknowledgements xiii 1 Introduction 1 Introduction and Function of the Book 1 13 Role of the Supply Chain 2 Managing the Supply Pipeline for Global Trade Flows 2 32 The Global Logistics Operator 5 Comparison between National (Domestic) and International Logistics 8 International Transport 9 International Trade Law 10 Employment Law 11 Globalisation and International Trade Environment 11 2 Factors and Challenges Driving Logistics and Supply Chain Management Factors Driving Global Supply Chain Management 13 Customs and Global Supply Chain Management 15 Management of the Inventory in the Supply Chain Analysis Including Vendor Management 18 Factors Contributing to the Development of Logistics 21 Asset Management in the Supply Chain 24 Lean Supply Chain Management 27 Lean Supply Workforce 29 3 Export Sales Contract Introduction 32 Market Environment 32 Market Entry Strategy 33 Constituents of the Export Sales Contract 34 Evolution and Revolution of Logistics and Supply Chain Management 37 Modern Logistics Concepts 40 Logistics Department 42

viii Contents 46 Logistics Providers Are Taking on More Responsibilities as the Industry 58 Goes Global 43 70 79 4 Constituents of the Export Sales Contract Continued Introduction 46 Contract of Affreightment: Terms of Delivery – Incoterms 2000 46 Factors Determining Choice of Incoterms 2000 50 Trade Finance – Introduction 51 Currency 51 Credit Terms 52 UCP 600 – Documentary Credits and Allied Documents 52 Market Development Strategy with Global Logistics Focus 54 Business to Business (B2B) and Business to Consumer (B2C) – Value-Added Benefit 55 Identifying Priorities 56 5 Constituents of the International Purchasing/Procurement System Introduction 58 International Purchasing Systems Constituents/Strategy and its Interface with the Management of the Global Supply Chain 58 Negotiating the Contract 63 Financing Global Supply Chains 66 6 Selecting the International Logistics Operator Introduction 70 Criteria of Selecting the Third-Party Logistics Operator 70 The Key Factors in the Development of a Successful 3PL 71 Contract Logistics 73 International Organization for Standardization – ISO Supply Chain Management Selection 74 Six Core Products – Supply Chain Management – Warehousing – Customs Clearance – Air Freight – Consolidation – Project Cargo 78 7 International Transport Introduction 79 Trade-Offs Inherent in International Logistics – Multi-Modalism 79 Key Factors in a Transport Mode(s) Trade-Off 83 Speed 83 Frequency 84 Packing 86 Insurance 86 Warehousing 87

Contents ix IT and E-Commerce 87 Project Installation Management 88 8 Operations Management 90 Benchmarking – Supply Chain 90 Global Supply Chain Management 91 Supply Chain Cycle Time Management Reduction 94 Logistics Result Evolution Strategy 98 Demand-Driven Supply Network 101 9 Security Global Supply Chain 107 Introduction 107 ISPS Code 107 CSI and C-TPAT 108 Radio Frequency Identification (RFID) 108 10 Specialised Software in the Supply Chain Process 114 Background – Need for Specialised Systems 114 Functions and Objectives of a Specialised International Trade System 115 Pre-Order – Enquiries, Quotations and Order Capture 115 Export-Specific Data 116 Shipment Procedures 117 Letter of Credit and General Compliance 117 The Software-Driven Process 118 Data Capture 118 Packing Operations 119 Shipping Arrangements 120 Dispatch-Time Data 120 Document Completion and Production 120 Statutory Reporting 123 Profitability Analysis 124 Summary 124 11 Global Trade Scene 126 Introduction 126 Global Trade Scene 126 European Union – Logistic and Supply Chain Strategic Environment 126 Asia 130 North America 133 An Analysis of a Houston (TX) Headquartered Freight Forwarder and 3PL Association International Freight and Logistics Network (IFLN) 136 India’s Automobile Industry Supply Chain Development 137 Logistics Focus on ‘Ceylon Tea’ – Sri Lanka 141

x Contents Thailand Food Supply Chain 142 Culture 143 International Agencies 145 12 A Strategic Focus 146 Introduction 146 Supply Chain Operations: A Focus on Adding Value to Brand Management 146 Product Outsourcing 150 Future Growth and Related Constraints of Global Supply Chain Management and International Logistics 152 Future Strategic Focus – Global Supply Chain Management and International Logistics 156 Glossary 158 Index 167

Preface During the past 10 years, globalisation of trade has accelerated and in consequence the international environment in which we do business has changed dramatically. It is therefore not surprising that I have received numerous requests from both business execu- tives and academics across the world to write a book on global supply chain management and international logistics and thereby fill a gap in the market. I am most happy to respond to such a request. It is the first title in this field and has been written in the same style as my other 12 titles on international business and shipping, spanning 45 years. The book, written in a simple language, has a strategic, analytical and pragmatic focus on the best practice code, supplemented by numerous diagrams and case stu- dies of an international nature. It has 12 chapters plus a glossary of terms and abbrevi- ations. Overall, it embraces both industrial and consumer sectors. Moreover, it reflects the growing importance of software-computerised technology in the development of the global supply chain management and international logistics. This embraces the point of origin of the commodity – raw material/componentised products to the manufacturing/ assembly point – in bound logistics, to the ultimate consumer/retailers distribution centre – outbound logistics. The lengthy supply chain, spanning often many international boundaries, embracing numerous regulations and cultures, and several transport modes is a complex operation, embracing third-party (3PL) and fourth-party (4PL) logistic operators. Overall, it embraces managing mobile assets – goods in transit along the entire supply chain. Moreover, it has a strong strategic focus featuring the constant process to deliver measurable results by added value in the logistics network by continuous audit aided by the latest technology such as radio frequency identification (RFID). This embraces the ultimate objective of the global supply chain management, which is to link the marketplace, the distribution network, the manufacturing/processing/assembly process and the procurement activity in such a way that customers are serviced at a higher level and yet lower cost. It demands professionalism, vigilance, creative thinking, pragmatism, efficiency and training at all levels of management. This book seeks to realise this objective. Doing business overseas can only be achieved through complete professionalism. The 12 chapters include: the global supply chain management and international logis- tics constituents and environment in the twenty-first century; factors driving logistics and supply chain management; the export sales contract formulation with focus on the global supply chain; advanced communication systems; procurement and competitive product sourcing; selecting the international logistics operator; international transport – trade-offs inherent in international logistics cost – time – speed – inventory information – transport – warehousing; operations management; secure global supply chain; global

xii Preface supply chain software; global trace scene; and developing a strategic focus to reduce cost, improve service and market development. A fundamental point to bear in mind is the relocation of many industries from North America and Europe to the Far East. They have been developed as the consumer wishes to have a competitively priced product with a wide choice of added value. This has resulted in a massive investment in the logistic infrastructure of high tech to serve these markets and customers. Overall, it must be stressed that logistics is a derived demand as a response to trade and transport in a globalised environment; hence its continuous growth in a expanding global trade environment. The book is an essential ‘aide-memoire’ to the discerning international global supply chain executive and international logistics manager operating within the company busi- ness plan. It breaks new ground, as it is global and not national, thereby spanning many national boundaries in the logistic and supply chain operation. The emphasis throughout is to develop strategies that focus on efficiency and competitiveness in a global market. It contains useful hints and numerous case studies extolling good practice. The book is not only ideal for the business community, but also students in college of higher education and universities throughout the world. This includes degree-level undergraduates studying international logistics, international transport, international physical distribution, international marketing and international business. Moreover, it is suitable for students taking professional examinations of the Chartered Institute of Logistics and Transport, the Institute of Export, the Chartered Institute of Purchasing and Supply and the British International Freight Association. It will also prove a popular title for chambers of commerce, trade associations, training agencies and colleges con- ducting short diploma courses and seminars on global supply chain management and international logistics. The book focuses strongly on management techniques and strategy, albeit on a pragmatic but thoroughly professional basis. It will prove popular with universities and business schools and continue to expand their international transport/trade/management degree portfolio requiring publications written in a lucid style, which provide a pragmatic yet professional approach to the subject. This includes diploma courses in management studies. In common with my other 12 titles this book is ideal for courses in Malaysia, Hong Kong, Malta, Thailand, Singapore, Turkey, Australia, New Zealand, USA, Pakistan, India, China, Jordan and Saudi Arabia. Finally, I would like to acknowledge, with grateful thanks, the secretarial help from Mr and Mrs Salter, Mr and Mrs Splarn and, as always, my dear wife Kathleen, in proof reading. This quintet has provided encouragement, forbearance, and above all complete professionalism to produce such a title. A. E. Branch May 2008 Reading England RG4 8XL

Acknowledgements I am greatly indebted to the various organisations listed below for their enthusiastic assistance, especially: Containerisation International Dachser Far East Ltd Export Master Systems Ltd International Chamber of Commerce International Standardization Organization Red Prairie Corporation UNCTAD



Chapter 1 Introduction Introduction and Function of the Book As we progress through the early part of the twenty-first century the pattern of inter- national trade and services is one of continuous change and challenge. It is becoming more complex and driven by many elements on a global basis. Today, companies and their entrepreneurs engaged on the global business network formulate a strategic approach to conduct their business based on a logistics focus. This embraces supply chain manage- ment operations both in material/goods and nonmaterial/service industries. It includes business-to-business (B2B) and business-to-consumer (B2C). Logistics can be broadly defined as the time-related positioning of resources ensuring that material, people, operational capacity and information are in the right place at the right time in the right quantity and at the right quality and cost. This embraces the ultimate objective of global supply management, which is to link the marketplace, the distribution network, the manufacturing/processing/assembly process and the procure- ment activity in such a way that customers are serviced at a higher level and yet lower cost. Logistics therefore contribute to a company’s relative cost position and create a basis for differentiation providing a ‘value-added’ activity and competitive advantage. Much of this involves outsourcing products/services in a computer literate environment. Overall, traders/service providers are focusing their attention on developing a global strategy in their search for lower cost and increased profits. This book seeks to realise this objective in a changing global supply chain environment. An alternative definition by the USA Society of Logistics Engineers is: Logistics is the art and science of management, engineering and technical activities concerned with requirements, design and supplying, maintaining resources to support objectives, plans and operation. This book, written in a lucid professional style, follows three main aspects: factors driving logistics and supply chain management; the operational aspects and the regula- tory network; and finally, the strategic focus. The text contains, throughout, case studies and further recommended reading. The text draws on the author’s experience in the industry spanning 50 years, embracing not only work and consultancy on a worldwide scale in the industry itself, but also as a lecturer/examiner at home and overseas. Finally, the book is written primarily for the student or businessperson who has limited knowledge of the subject but is keen to develop a viable global/international business, thereby adding value to the company portfolio.

2 Introduction Role of the Supply Chain The supply chain has been defined as the sequence of events in a goods flow, which adds value to the value of a specific good. These events may include conversion, assembling and/or disassembling and movements and placements. The global supply chain crosses international boundaries. Basically, the supply chain is linking the producer/manu- facturer/supplier with the distributor/consumer involving a dedicated service. It is com- pletely transparent with each element of the supply chain throughout the transit. It may be the movement of cars from China to Europe/North America, or the reefer container market embracing food products direct from the supplier to the consumer/supermarket store/distribution centre crossing international boundaries. A global logistics supply pipe- line is featured in Figure 3.1 (see page 3), embracing procurement (buying the goods), manufacturing/producing the goods, quality control, handling/loading cargo on con- tainer/pallet for shipment by sea/air; delivery to distribution centre; unloading container; delivery to store/warehouse; delivered/bought by consumer. The components of the sup- ply chain are examined in greater depth on page 3. The key to a successful supply chain is customisation, innovation, scalability (integration of unlimited number of clients); multichannel, security and flexibility (see page 3). Other areas, as advanced by Professor Hau Lee, focus on agility, adaptability and alignment (see page 8). Managing the Supply Pipeline for Global Trade Flows Managing the flow of goods, information and money across borders is a highly complex, regulated and dynamic process. All companies, large and small, eventually reach a deci- sion point with regard to global trade management. This is the core competency that justifies a continuous investment in people, technology and resources, or it is a process best managed by a partner whose primary focus and business is achieving excellence in global trade management (GTM). The rationale/benefits of outsourcing all or part of company operations may be sum- marised as follows. It identifies the driving forces behind a company decision to out- source and the benefits occurring, together with the complexity of global trade flows and challenges. a Many companies do not believe that GTM is or should be a core internal competency; b The ability to scale GTM resources and capabilities quickly and cost-effectively is a growing challenge; c Outsourcing partnerships typically provide companies with better visibility/trans- parency to their GTM performance than when the processes are managed ‘in house’; d Improves operational performance and process control; e Ability to scale global trade activities without adding resources/cost. Examples, including Black & Decker and ITEC, reached a point where they either had to increase the size of their GTM team to keep up with increased trade activities or outsource the function to a third party. A further example arises in an automotive manu- facturer, which had been able to increase its global trade activities while reducing its in-house GTM team by 90 per cent; f Reduction in customs duties paid (see page 17). This is one area where correct product classifications are essential and involves the International Convention on Harmonized Commodity Description and Coding system administered by the

Table 1.1 Global logistics supply pipeline The diagram represents the acceptance of an overseas buyer to purchase a quantity of custom built furniture of high value from Europe for a corporate client in the hotel business in India. The goods on arrival have to customise to meet with the corporate client needs. Special packaging and handling arrangements are required. The payment is in USD and under CIF terms. The diagram must not be regarded as an exhaustive global logistics supply pipe line, but merely an insight into one, if rather over simplified. Overall, e-commerce features strongly throughout. • Export enquiry • Despatch of • Procurement • Despatch • Shipment by • Goods arrive • Despatch to • Goods • Product acceptance of • Loading on pallet/ air/sea • Delivery to assembly plant despatched quotation to customers specification • Price quotation containers • Customs distribution centre • Goods taken • Compliance • Delivery • Logistics input • Road/Rail/Canal to clearance • Port charges by road/rail to • Manufacturing/ • Duty paid by buyer buyer’s with buyer schedule seaport/airport • Buyer makes • Documentation premises for • Incoterms processing goods • Documentation payment of processing/ specification • Quality control presented to customisation • Credit rating CIF • SGS inspection prepared and goods on in destination • UCP 600 customs country buyer • Customs prior to despatched shipment • Sourcing • Routing • Title of electronically prior • 4PL • Packaging departure electronically to component • Currency • Pre-book ship/ goods pass to goods arrival • 3PL customs etc. • Buyer presents parts: cost/ flight/container • 3PL to buyer • 3PL • RFID import licence to delivery • 3PL • Costing/pricing customs • Payment terms • 4PL • Logistic input • 3PL engaged

4 Introduction World Customs Organization. Failure to feature the correct classification results in companies paying too much on duties and taxes, or in some cases underpayment. This is also problematic from a regulatory and corporate responsibility perspective. It embraces customs planning; g Better managed broker networks. This yields savings in time and money, and labour can be realised by consolidating import transactions and communications. Better data quality also produces benefits; h Faster cycle times. This is a high yield benefit both to the shipper and consumer through quicker transit times. It embraces many elements (see page 78) such as better data quality and customs clearance delays. Moreover, better broker management helps to resolve exceptions quickly; i More intelligent business decisions. This focuses on having better visibility of global trade activities, in particular the criteria in regard to sourcing, mergers and acquisitions; j Companies that outsource generally do not believe that GTM is or should be a core internal competency; k The ability to scale GTM resources and capabilities quickly and cost-effectively is a growing challenge in a global competitive market; l Outsourcing partnerships typically provide companies with better visibility to their GTM performance than when the processes are managed ‘in-house’; m As featured in item (f), relative customs compliance across border shipment typically involves accurately completing and filing up to 35 documents interfacing with about 25 parties, including customs agencies, carriers, freight forwarders, brokers, banks and ports, and complying with over 600 laws and 500 trade agreements that are constantly changing (see page 64); n Also associated with the customs requirements under item (f) is the classification of products under the Harmonized Tariff Schedule, which poses problems to many companies, particularly those with dynamic product portfolios or products with complex bills of materials. The fact that the product classification varies by country adds yet another layer of complexity; o Regional trade agreements and bilateral trade agreements and tariff preferential agreements all add to complexity of customs compliance globally; p As supply chains become more fragmented and dispersed, the risk of terrorism, theft, smuggling, counterfeiting and other issues also increases. Today, security- related initiatives exist to counter such situations including (see page 108) Customs– Trade Partnership Against Terrorism (C-TPAT), the Container Security Initiative (CSI) and the Advanced Manifest Rule; q Companies that trade globally also face an increased level of financial risk. Duties, taxes, transportation charges and currency exchange rates are contributing factors, but there are other less tangible factors that also influence the bottom line, such as the cost of increased inventory and longer cash to cash cycles due to customs clearance delays; r Also achieving compliance with the Sarbanes–Oxley Act of 2002 – a law aimed at improving the accuracy and reliability of corporate financial statements – is depend- ent on having access to timely, accurate and complete information, and establishing process controls – the same success factors required to create more secure and efficient global trade operations; s Many companies engage in global trade to reduce costs, particularly to find less expensive sources of raw materials, finished goods, or labour, but viewed from

Introduction 5 a perspective, total cost may actually increase by going global. There are other factors that companies may fail to consider: staffing a GTM team – trained experi- enced personnel are difficult to find; investing in GTM technology – companies must invest in GTM software (see page 118) and have a scalable IT infrastruc- ture to automate a variety of trade activities; and missed opportunities for cost avoidance such as failing to take advantage of preferential trade agreements (see page 74) and by misclassifying products and paying too much in duties and taxes; t Today, supply chains are becoming more fragmented and dynamic than they were a decade ago. The more countries in the supply chain, the more difficult it becomes to understand and manage the multitude of trade regulations and constraints involved. This is driven by companies in an effort to reduce cost and/or penetrate new markets quickly, and relocate their manufacturing operations and vendor base to low cost countries such as China, India, Brazil and Mexico. Moreover, the manufacturing base exports the product to a third country. This represents a complex operation difficult to manage. The foregoing must not be regarded as an exhaustive list and will be developed as we progress through the book. The Global Logistics Operator The global logistics operator concentrates on six key areas sought by customs. 1 Strategic solutions to the problems of long-distance product sourcing and move- ment. This is achieved by matching the client’s business needs to the latest techniques and expertise to formulate solutions to the problems of long-distance product sour- cing and movement. An example is the European-based department stores buying a range of consumer products from the Far East. Key factors are quality control, coping with variations in consumer demand and distributing supplies in a cost- effective manner; 2 Companies that can provide capabilities interfaced across a range of different transport modes including sea, road, rail, canal and air as found in multimodalism; 3 Improvements in quality of service to end customers. This basically centres on customer asset management – ensuring the goods arrive in a quality condition to a prescribed schedule with zero failure rate; 4 Improvements in profits realised through all the marketing and financial benefits to the user inherent in the global logistic system; 5 Management of ‘trade-offs’ within the supply chain; 6 A fully outsourced logistics management service. Users of the service include automotive manufacturers, high-street retailers, wines and spirits producers, footwear, fashion garments, sports goods and electronic manufacturers. The global logistics operators focus attention on the four key service areas detailed below: 1 Supply chain management. This requirement may be illustrated by the leading retail chains sourcing their merchandise from suppliers in Europe, the Far East and the US. The logistics operator’s task is to ensure that goods of a saleable quality are

6 Introduction manufactured and transported safely and cost-effectively, and are delivered on time. This key service covers three aspects: a vendor management, involving the processing of customers’ orders, direct to their supplies and monitoring the production process; b information, featuring receipt of customers’ orders via EDI/RFID (see page 108) download (this leads to 24-hour monitoring and reporting of status and cost down to item level); c communication, permitting customers to receive advance notice of shipments which are off schedule via international email links. The key benefits are reduced inventory levels, improved visibility of all costs to time level, improved delivery on time and clearer management responsibility. Study the supply pipeline in Figure 1.1. 2 Delivery and customs clearance. An example of this requirement is provided by a leading drinks company with over 50 brands worldwide. The objective is to receive and handle stocks and to arrange transport and overseas shipment. The four main features of the service include: a inventory management, featuring direct data exchange to provide online reporting; b order picking, embracing maximising deliveries of export shipments direct to the end customer; c quality control including checking on arrival, arranging, relabelling and repack- ing as required; d security, the adoption of sophisticated arrangements suitable for a high-value commodity. The key results include delivery only when market demand dictates, secure and cost- effective storage and efficient onward distribution services. 3 Distribution management. This is the requirement of a major sportswear company which imports merchandise from suppliers in the Far East. The objective is to improve upstream process controls and maximise direct delivery to high-street stores in Europe. The three main features of the service include: a quality control, embracing collecting goods from suppliers and ensuring com- pliance with specified quality standards; b consolidation and delivery, embracing sorting, labelling and packaging goods according to end-customer order requirements and providing delivery direct to the customer; c information, embracing full integration via EDI between the customer’s pur- chase order system, their financial and distribution systems and the global sup- ply chain management system. The ultimate results were improved supplier quality standards, reduced warehousing and handling costs and shortened order cycle times. 4 Import logistics and outbound distribution. This is illustrated by a manufacturer of electronic goods, which sources components in the Far East for manufacture in Europe. The objective is to manage the inbound supply of components to exacting production schedules and distribute the finished products across Europe. The three main features of the service include:

Figure 1.1 Global logistics supply pipeline reproduced courtesy P & O Nedlloyd.

8 Introduction a supply chain management, embracing the despatch of orders, the monitoring of production, consolidation and delivery on time to the manufacturing plant; b information, embracing tracking progress in the supply chain so that customers can accommodate changes to the production plan; c consolidation/distribution, featuring maximising container usage to cut costs and distribution ‘on time’ to retailers. The key results are proactive control of delivery schedules and reduced shipment costs from the consolidation and integration of inward and outward distribution. Overall, the global logistics company concentrates on six core products: supply chain management, warehousing, customs clearance, air freight, consolidation and project cargo. It will improve supply chain visibility by developing tailored processes and track- ing systems. This will lead to improved buying processes and decision-making, reduced stock levels and improved reaction times in delivering to end users. Overall, it will reduce supply chain costs, thus cutting lead times, creating fast-flow procedures and introducing upstream controls. To amplify the foregoing, a leading Asian company, Li Et Fung, operating in the Chinese market, engaged in sourcing, borderless trading and virtual manufacturing and supply chain management, identifies seven core principles that underpin the company. These are detailed below: 1 The customer must be at the centre and responsive to market demand; 2 Focus on core competency and outsource new-core activities and develop a position in the supply chain; 3 Develop a low risk and profit-sharing relationship with business partners; 4 Design, implement, evaluate and adjust the work flow, physical goods flow and cash flow in the supply chain; 5 Adopt information technology to optimise the operation of the supply chain; 6 Shorten product lead time and delivery cycles; 7 Lower cost in sourcing, warehousing and transportation. Underpinning its success is globalisation, which is having the effect of shifting com- petition between companies away from traditional spheres and more onto the level of efficiency of their supply chains. Moreover, by applying advanced supply chain technolo- gies and global sourcing expertise, it allows clients to focus fully on core competencies, lowers sourcing, warehousing, handling and storage costs, reduces working capital and minimises capital expenditure on distribution assets. The company advocates sourcing from several countries for individual products and in so doing is able to form a dialogue with the management and not the ownership supplying the components. Comparison between National (Domestic) and International Logistics As has been alluded to in earlier pages, the business community focuses for growth on a global scale, with many governments facilitating such an objective. Companies realise that trading overseas raises standards at all levels within the company and develops a fast moving management culture change. It encourages adaptability and continuous research to become more competitive in a high-tech fast moving environment.

Introduction 9 The national logistics operator serving the local indigenous market usually has the advantage of being aware of the structure of the market, its infrastructure and all its elements, in particular, regulations, all the costing elements from manufacturer/produc- tion to the distributor/consumer, the supply chain under the national government, a common language, a range of economic/industrial indices indicating the changing market/trends, taxation levels, employment law, consumer protection and competitive law. Hence the logistics operator/business company remains focused on one country, but must be equally conscious of inwards investment whereby overseas companies penetrate the market with their goods and services. The international logistics operator in designing the supply chain permeates several countries and may extend to several thousand miles from Australia/China/India/Malaysia to Europe and North America and vice versa. It is a distant market and embraces numerous conventions (see page 145) and complex regulations especially in the area of trade law, international finance, market entry regulations, customs, taxation, lan- guage, transport regulations, product specification/regulations, agency law, repatriation of funds, appointment of directors/managers, capital structure of company, unionisa- tion, economic indices/market trends and social structure embracing a developed coun- try, a developing country or less developed country; also, the degree to which the market is high-tech and developed. In consequence it is often the practice to engage the 3PLs and 4PLs. The international logistics operator must be competent in all areas of the global supply chain. A synergy must be developed between the supplier and distributor together with all elements of the supply chain export/airport, carrier, handling, customs, finance, secur- ity warehouse, etc. Transparency is essential throughout the supply chain together with advanced software. Focus must be on inventory management, vendor management, multi-sourcing, outbound logistics, inbound logistics culture and the growing develop- ment of RFID (see page 108) to focus on cargo tracking. As we progress through the book we will identify the skills to develop efficient international logistic design/planning/operation and global supply chain management. International Transport International transport comprehension is at the core of developing an efficient global logistics strategy. It is important that the global logistics entrepreneur fully understands the economic characteristics of individual transport modes and the international con- ventions associated with each. Both will be dealt with fully from a logistics standpoint later in the book (see page 79), but we will now examine succinct key points. The range of transport modes embrace rail, sea – bulk and containerised cargo – air, inland waterways (usually linked to seaports) and road. Global logistics usually embraces combined transport or multi-modalism such as road/sea/rail, road/air/road, rail/sea/rail, which form the supply chain in transport terms on a door-to-door basis. International transport law embraces all transport modes. No international uniform regime is in force to regulate liability for loss, damage or delay arising from multi-modal transport. Instead, the present legal framework governing multi-modal transport consists of a complex array of international conventions designed to regulate uni-modal carriage, diverse regional/subregional agreements, national laws and standard term contracts. A range of legislation now exists and these maybe summarised as follows: Combined Transport: ICC rules for a combined transport document (see page 83);

10 Introduction UNCTAD MMO convention; UNCTAD/ICC Rules for Multi-modal transport documents; European Union – International Liability; and Convention for Security Containers (see page 107). International Road Transport: CMR convention governing the international carriage of goods by road signed in Geneva in 1956 and enacted into law in the UK by the Carriage of Goods by Road Act 1965 (see page 83). International Rail Transport: COTIF Convention Concerning the International Carriage by Rail was signed in Berne in May 1980. It was given legal effect in the UK by the International Transport Conventions Act 1983 (see page 79). International Air Carriage: is subject to either the Warsaw Convention 1929 or the amended Warsaw Convention 1955. Which of these conventions applies depends on which Convention the countries of departure and arrival have ratified. Sea Carriage embracing despatch of goods by sea generally involves a Bill of Lading as evidence of the contract and features the various international regulations. Key areas embrace the following (see page 83): the Hague rules (1974), Hague-Visby Rules (1988), Hamburg Rules (1978), and Limitation of Liability for Maritime Claims which is embraced in the Merchant Shipping Act 1995. International Trade Law International trade law/regulation is at the core of conducting business overseas and the global logistics entrepreneur must be aware of all its ingredients when formulating a strategic and operational/planning process. Given below is a succinct overview, which will be examined in greater depth later in the book (see page 79). a Vienna Convention on Contracts for the International Sale of Goods came into force on 1 January 1988. It was sponsored by UNCITRAL (see page 46). b Product liability is the liability of the producer of a product which, owing to a defect, causes injury, damage or loss to the ultimate user. The US and EU have differing directives. Global logistics operators should check out the directives operative in the country of importation (see page 33). c Intellectual property rights embrace patents, registered designs and design right, registered trademarks and copyright. These rights make new inventions, designs, brand names and other creations, a form of property. Hence, property owners have the right to decide who can use their property. Overall, they create a system through which innovators can benefit from their work – whether it be an electronic timer, designing a fashion shoe, marketing chocolate bars under a new brand name, creat- ing a new musical or publishing. The World Trade Organization (WTO) are very much in the lead (see page 126). Global logistics operators, when considering overseas markets, should look closely at potential markets in foreign countries. d Patents embrace virtually all machine products, and processes – including their indi- vidual components/parts – are subject to three conditions: (i) is it new, (ii) is it inventive, (iii) and is it capable of industrial application. Patents are not confined to major technological advances. They embrace agriculture, medicines, paints, electron- ics and photography. Currently there is no world patent. e Designs. These embrace two forms of design protection: (i) a registered design pro- tects the appearance of a product if the product is novel and has its own character. You cannot register a design that is purely functional. (ii) Design right protects

Introduction 11 the original design of the shape or configuration of items. This includes purely functional items. It does not include two-dimensional designs. Some countries give protection like design right under copyright law. f Copyright gives rights to the creators or original literary, dramatic, musical and artistic works, published editions of works, sound recordings, films (including videos), broadcasts, cable programmes and computer programmes. They cover copying, adopting, publishing, renting, performing and broadcasting. There is no registration for copyright in the United Kingdom. The protection available in other countries is set out in the national law of that country. g Trademarks are signs that distinguish goods and services of one trader from those of others. For example, the contents of a washing powder sold under a particular registered trademark may change many times over the year, but the trademark means that only the company or its licensees can sell a washing powder under that sign. The CE is the symbol all products sold throughout the EU must bear. The Protocol to the Madrid agreement is a system for the international registration of trademarks. Its pro-centralised register of trademarks is held by the World Intellectual Property Organization in Geneva and allows all trademarks applied for or registered through the National Trademark system to be extended to and protected in the US. The UK is a signatory to the Madrid Protocol and its provisions were implemented by way of the Trademarks (International Registration) (Amendment) Order 2000 (see page 79). Employment Law Employment law covers both criminal and civil laws. It embraces a wide area and includes contract of employment, trade unions and their relations with employers and members, work councils, redundancy, health and safety, taxation, and so on. The EU may be regarded as a highly regulated employment market. Internationally, employment law differs widely. Employment law is very relevant to global logistics strategists who are outsourcing their manufacture/assembly/service base on a joint venture, operating alliance, merger and acquisition and setting up a company in another country (see page 79). Globalisation and International Trade Environment Logistics and globalisation feed off each other in terms of their development. During the past 25 years, the pattern of international trade has changed dramatically. Hence the need for the logistics operator to comprehend the international trade environment that s/he operates in to devise an efficient supply chain. The area will be dealt with later in the book, but it is desirable that we have an overview at the commencement. There are various factors that have contributed to the changed international trade environment. This includes e-commerce, open communications systems, politics, tech- nology, economics, cultural and legal and international agencies. This includes the WTO, who have opened up market access, and the ISO, who feature in food chain supply chain management code (see page 74). A further area is the development of economic blocs, such as the North American Free Trade Area (NAFTA), the Association of Southeast Asian Nations (ASEAN) and the Southern Common Market of Latin America (MER- COSUR), and emerging regional trade agreements. The technological area embraces high-tech supply chains.

12 Introduction Globalisation of markets and trade results in the provision of a product or service that can be sold virtually in any market of the world, providing the economic infrastructure and culture can support it. The key to it is the design and specification of the product or service and the added value it provides to the user or consumer (see page 107). Useful Sources of Information Chartered Institute of Logistics and Transport <www.ciltuk.org.uk> Financial Times <news.ft.com/ft-reports> International Freighting Weekly <www.ifw-net.com> ISO (International Organization for Standardization) <www.iso.org> WTO Annual Report Publications <www.wto.int>

Chapter 2 Factors and Challenges Driving Logistics and Supply Chain Management Factors Driving Global Supply Chain Management Factors driving logistics in the twenty-first century are focused on companies striving to become more competitive and providing customers with added value in the supply chain. It is more complex and more demanding in a global market environment in comparison with a local domestic market whereby the logistic operator is usually very familiar with the marketplace and its constraints and opportunities. The key for any global logistics operator is the differential from other players in the marketplace and to have a separate identity. Basically to demonstrate to customers they have a certain added value in the marketplace. This embraces competitiveness and cost featuring efficiency. It may be supply chain cycle time management reduction (see page 24) or lean supply management (see page 27). An analysis of the competitive advantage identifies three elements, each of which has an interface with the other: customer, company and competitor. The customer requires competitive pricing and the value-added benefit from the purchase, both actual and perceived such as warranty and after sales. S/he may have a wide choice such as from the preferred supplier and the competitor. The differential may be not only cost, but also technology. Hence, the choice differential is how efficient is company A compared with company B. One particular concept that Michael Porter has brought to a wider audience is the ‘value chain’: Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product. Each of these activities can con- tribute to a firm’s relative cost position and create a basis for differentiation . . . The value chain disaggregates a firm into its strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of differen- tiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. The value chain (Figure 2.1) can be identified into two types – primary activities includ- ing inbound logistics, operations; outbound logistics, marketing and sales and service; and support services such as infrastructure, human resource management, technology development and procurement. This is a very complex operation when comparing the domestic supply with the global operator. All the support activities must be logistic literate/focused.

14 Factors and Challenges Driving Logistics and Supply Chain Management Figure 2.1 The value chain. As indicated earlier the challenges facing the global supply chain management in the twenty-first century are becoming increasingly complex and very demanding. It all stems from the most senior management in a company to accept and manage change, and to recognise that through the World Trade Organization (WTO) the world has become a global marketplace with trade barriers becoming eliminated, and fewer restrictions on the flow of goods. This also extends to movement of labour, inwards investment, intel- lectual property, and, moreover, the development of e-commerce – digital trade – and continuous expansion of trade routes such as remodelled container service, development of hub ports, extension of the hub and spoke system, development of new and existing airports, and emerging nations such as Brazil, India, China and Russia and the develop- ment of 3PL and 4PL. Trade volume doubles every 12 years and in political terms governments recognise it has political influence globally. A further factor is the growing development of the Free Trade Zone (FTZ), economic zones that favour such countries in the expansion of an export-led economy and industrial expansion/experience. Multi- national industries (MNI) have long recognised this situation by reviewing the structure of their production strategy/location/supply chain/market location/productivity, etc. Hence companies today no longer rely on a national production base in a high-cost market, often relying on long supply chain component parts, but relocate closer to their component supply plants and centralise their production. An example arises with Dyson. The final point is business confidence to trade among nations, much of which has emerged through the ICC and the relative political stability, especially in the money markets. It is this background that drives the global supply chain management. Overall, there are five factors on which to focus, to manage the global network of materials and information flows that transcend many borders and management cultures: a The centralisation of a one-production centre – maybe more than one – generates long lead times of supply. The production centre is likely to rely on ‘inbound’ com- ponent sourcing. Ideally, a level of intermediate inventory between the manufactur- ing and customer/distribution is required to buffer against extended transit times. It

Factors and Challenges Driving Logistics and Supply Chain Management 15 needs continuous review. Such multi-country sourcing of inbound complete sour- cing needs particular review when the goods cross international borders and attract customs duties and often inherent clearance delays, thereby extending the lead supply time. This customs clearance is eliminated with the FTZ (see page 79) and intra-EU trade operating in a customs-free zone. Hence many companies have set up their production/component assembly/distribution centre in the EU with its 27 countries and population of 520 million, due to its good infrastructure/common product specification CE/custom-free zone/being the wealthiest regional population in the world. b Managers are often reluctant to eliminate long-established suppliers, but the strategy of pursuing supplier rationalisation must be pursued with vigour and critical analysis. It will yield administration cost savings and maybe freight/supply chain time benefits. It also poses the question of developing multifunction component units rather than the single function unit as found increasingly in each new gener- ation of technology. It is a route to producing more competitive products and rationalisation of suppliers. c A continuous audit review gathering market intelligence must be conducted of both inbound and outbound supply chain embracing all its elements, including the value- added benefit emerging from the 3PL and 4PL. The urgency/importance of such a task manifests itself when comparing national/local suppliers with the global supply chain. The latter embraces the international regulations subject to continuous review/change including customs, the development of infrastructure – trade routes/ new carriers/new transport equipment/handling facilities, new IT providing com- plete transparency in supply chain and cargo consolidation (see item d). d Carriers are driven by the needs of shippers to add value to the service. Three areas present an ongoing challenge: innovation featuring (i) multi-modalism operating alliances, embracing joint services as found in Dubai and Singapore, containerisa- tion – FCL/LCL/road/sea/rail, land bridge – trailer/truck – road/sea/road, land bridge – pallet/IATA container – road/sea/air/road, trailer/truck – road/sea/road, swap body – road/rail/sea/road; (ii) consolidation focusing on small consignments usually through logistics agent; and (iii) hub and spoke system relying on hub airport/seaports being served by feeder services. Overall, the foregoing could reduce freight cost, inventory holding, warehousing, lead time, packaging, insurance, and improve customer service. e The procurement officer in product sourcing must have full cognisance to minimise payment exposure to payment of customs duties and taxation. Hence a vigilant customs planning strategy and challenge must be devised to minimise traders’ cost of compliance and customs duties, maximise traders’ use of facilities and reliefs, avoid risk of seizure and penalties and improve traders’ profitability and cash flow. The key to it is a well trained, organised with a strong interface throughout, dedicated logistic global supply chain team with complete transparency in all the inbound and outbound sectors. This will maximise competitiveness and custom focus. Customs and Global Supply Chain Management We have already alluded in this chapter to the significance of customs planning in global supply chain management, but its importance merits a return to subjective deeper analysis, in particular, the need to focus on the need for efficiency and coordinating/

16 Factors and Challenges Driving Logistics and Supply Chain Management reviewing/auditing the efforts of the procurement manufacture, marketing and distribu- tion aligned to the supply chain management team. Each of these elements may be located in a different country. As materials and goods are moved from one country to another, borders are crossed and any goods or materials shipped/air freighted become subject to customs authorities control. Political initiatives in liberalising trade and finance, coupled with technological innov- ations in information, communications and transport technology have stimulated the ongoing process of globalisation and placed more pressure on personnel to add value to the global supply chain. Customs authorities, by administering and supervising the movement of goods and materials across national frontiers, play a key role. Costs for business can be identified in three areas as follows: 1 Direct cost associated with paying duties embracing: customs duty, excise duty, anti-dumping duty, countervailing duties, CAP levies, import VAT and compensa- tory interest. 2 Costs for business associated with the compliance of import restrictions and in meeting obligatory customs requirements such as prescribed accounting procedures and information requirements – including statistics – and compulsory document requirements. 3 Costs, which may include opportunity costs, by failing to take advantage of any customs regime or trade concessions. Likewise, the inappropriate use of any customs regime, or procedures, which may give rise to future liabilities. As goods and materials move across national frontiers managing the customs function is a key factor to success within the efforts of supply chain management. Within each of the supply chain functions, which include procurement, manufacture, marketing and distribution, customs considerations can have a significant impact. Preferential tariffs for goods and materials may exist in a wide range of countries. For example, the duty rate in the EU on a television tube sourced in Malaysia is 14 per cent, Thailand 9.8 per cent, South Africa 7.3 per cent, and nil in Poland with each country subject to meeting certain conditions. In manufacturing it is prudent to consider any customs regimes that give preferential duty rate advantages. They may suspend, reduce, or defer the duty burden available in the UK and EU, including customs warehousing, inward processing relief, outward processing relief, returned goods relief, standard exchange system and processing under customs control. When the buyer becomes involved in market sourcing selection, it is important to bear in mind changes in duty rates. Examples include Dubai and China, recent entries to the WTO, which will encourage reduced barriers. Similar opportunities arise for buying sourcing as trade agreements such as MERCOSUR (Southern Common Market – of Latin America), North American Free Trade Area (NAFTA) or ASEAN Free Trade Area (AFTA) further develop, expand and consolidate their customs preferential strategies. When supply chains take on an international dimension it is essential to take account of customs requirements and procedures, including customs law. Inefficient manage- ment of customs control can lead to increased inventory costs, delays at frontiers and loss in supply chain responsiveness. A firm’s enhancement in competitiveness arises in cash flow, duty liability and customs clearance time. ‘Trade off’ considerations that need to be made are the advantages that an available regime may bring, against

Factors and Challenges Driving Logistics and Supply Chain Management 17 any compliance, accounting or reporting cost, operating cost and commercial restric- tions imposed by the regime. Customs facilities available to the buyer include the following: a Import into free circulation (see page 32) – customs duty and import VAT is paid and goods are removed from customs control; some goods may be subject to import licences. b Customs warehousing (see page 78) – enables goods to be stored without payment of import duty or VAT until released for free circulation or placed under another customs regime. c Free zones (see page 79) – enables goods to be stored and processed without payment of import duty or VAT. d Inward processing relief suspension (see page 79) and drawback – allows conditional relief from duty on imported materials and components for use in the manufacture of products for exports; under IPR suspension duty is suspended while under IPR drawback duty is paid and later reclaimed. e Processing under customs control – allows specific dutiable components and materials to be imported without payment of duty, processed into finished products and released for free circulation at the duty rate of the finished goods – the rate may be lower than the rate of the components and materials used in the production process. f Temporary importation – gives relief from duty for goods imported for a given period of time – maximum 24 hours – and re-exported in the same country. g Returned goods relief – allows relief on reimportation of goods previously exported. h End use – reduced or zero duty for goods intended for a specified end use. i Other – goods are re-exported, destroyed or otherwise disposed of without payment of duty. Customs facilities available to exporters include the following: a Export – goods leaving the EU may be subject to licensing requirements, export duties and commercial policy measures. b Outward processing relief – allow relief from duty on EU goods reimported after repair or process abroad. c Community Transit – an EC customs procedure, which controls and facilitates the movement of certain goods from one port of the EC to another, delaying duty and VAT payment. d ATA carnet – may be used to simplify customs clearance of temporarily exported goods: the carnet replaces normal customs documents both at export and reimport. e TIR carnet – subject to certain conditions, this allows goods to travel across national frontiers with the minimum of customs formalities, duty and VAT. Outside the EU, other customs regimes may exist that could give an international supply chain similar competitive advantages. These embrace free trade zones, distriparks (see page 126), export processing zones, or tariff suspension for industries identified as being essential in developing the governing economy. Any one of these regimes could give the overseas buyer considerable advantage – for example, third country assembly, processing or distribution – in managing cost and duty liabilities and should be considered when planning and managing an international supply chain.

18 Factors and Challenges Driving Logistics and Supply Chain Management To develop further customs issues, it is essential for the supply chain professional to take into account considerations that go beyond the actual physical handling of goods. There are many customs considerations worthy of attention that could add value to the supply chain. In many instances, customs issues can be deal breakers or makers, depending on trade policies, duty, rates and feasible customs regimes. Customs law is not static. Rules and regulations are constantly reviewed and businesses need to be aware of developments and changes and their interpretation. Opportunities may exist or evolve that could give a business a competitive advantage and reduce the impact on the supply chain of crossing international borders. For example, electronic commerce is becoming more widespread globally with traders reporting to customs electronically (see page 114). Usually as a prerequisite, some form of paper trail is required. Electronic reporting and electronic declarations can simplify complying with customs. Electronic reporting is usually subject to customs authorisation. Another example is customs warehousing (see page 87), which in principle allows the storage of goods free of duty and import VAT. This type of warehouse permits the company’s inventory system to be used to track and control inventory for customs warehousing purposes rather than a specific physical location. Management of the Inventory in the Supply Chain Analysis Including Vendor Management The management of the inventory in the supply chain is a critical area in the cycle time analysis. This embraces from the time when inventory is needed until it is received, sold and sales payment is received, and is particularly important to company success and longevity. The longer the cycle time the larger the amount of inventory that will be carried to balance against uncertainty. From an accounting and financial evaluation, inventory is an asset and a positive for businesses. A contract manufacturer turns inventory 3.6 times, a retailer turns inventory 4.1 times, and a wholesaler turns inventory 4.4 times; each have a differing inventory strategy. It embraces raw, work in progress (WIP) or finished product; each have too much money tied up in the inventory. Development of a strategic focus on inventory is best expressed in companies operat- ing a payment cycle every 90 days resulting in four payments per year. Hence a lot of capital is tied up, which earns nothing while goods remain unsold. Moreover, the work- ing capital to run the company is much increased and thereby is detrimental to the company efficiency and competitive pricing strategy. Inventory has a limited shelf life. There is a window of opportunity to sell the product. Once that window closes, the sales value falls, and the level of profitability and inventory yield are not maximised. In addition to the capital issue, excess influences service and operations, unnecessary freight costs are incurred to bring the products to the warehouse rather than direct to the buyer/consumer. The inventory works against having a good warehouse layout to reduce order picking. It adds to labour cost. If the company does cycle counting, then such inventory is counted too often and this is wasted time and effort. Too much inventory results in having a distribution centre larger than really necessary to store the extra items. Hence cost and impact are very large. Overall, it restricts agility to respond quickly to changing conditions. Other aspects include insur- ance cover, risk of obsolescence and discount pricing to dispose of fast-moving goods (FMG) such as the computer, perishable products, etc.

Factors and Challenges Driving Logistics and Supply Chain Management 19 The causes of excess inventory are numerous and diverse. Much depends on the product and level of competition. A key factor is the degree to which the logistic supply chain network has been developed. We will now focus on some of the reasons for excess inventories to be followed by a strategic development: a Loss of sales: the new availability of a product to sell encourages the potential buyer to patronise a competitor and the fear of not having an item in stock is stronger than the fear of not being able to sell the item. Moreover, it results in money in the competitor account, thereby improving cash flow. Hence, a hedge factor arises to carry more items and more inventories than is necessary. A further factor is an over- optimistic sales forecast with inadequate market research and intelligence. b Price strategy: companies take advantage of lower prices for volumes in excess of what they need or will use in a reasonable time. The strategy is that it is ‘too good a deal to pass up’, even if it sits forever in inventory. Prima facie economical purchases may actually be uneconomical. c Obsolescence is a great risk in overstocking. It results in writing off the inventory, which impacts on profit and loss (P&L) for the year. d Absence of a range of effective inventory management measures: this embraces no aggressive measures to measure and manage the inventory, inventory ageing and inventory velocity. e Planning: inventory planning is not based on demand management or similar criteria. Basically, it is more of an initiative activity with long lead times for items, especially those imported; this compounds the problem. f Supplier performance and analysis is a key area. Suppliers are not managed even when suppliers fail to ship or deliver more than 25 per cent of the procurement on time. Ideally, a zero tolerance or near zero tolerance should be sought, as practised by the Japanese. Firms build in extra time to receive their orders. They carry extra inventory to compensate for the supplier delivery issues. Poor supplier performance generates increased inventories because of its unreliability and extended time to deliver. g Absence of any process embracing buying and ordering transactions: it may arise through a perceived or intrinsic need. This embraces companies with no strategic processes for customers, sourcing, or tactical processes for sales and operations planning. Procedures that lack processes, whether for inventory or other purposes, may be used instead. Expediting is another sign of no process. Inventory is used to compensate for the lack of process or for lack of execution. h A unified approach embracing one-approach-fits-all: the inventory strategy is not segmented to reflect differences in inventory as to profitability and turn velocity. Consequently, companies end up carrying too much inventory, especially for slower turning items. Developing a strategic approach is essential with focus on processes at all levels of management throughout the company. A company commitment is required throughout the business, which we will now examine. i Inventory analysis. This will identify daily measurement of movement throughout the inventory, especially in terms of velocity, ageing and turns. j Developing a lean inventory (see page 27) throughout the business. Excess inventory and additional management time represent waste and add no value to the product.

20 Factors and Challenges Driving Logistics and Supply Chain Management Many departments can create non-value time and inventory. Lean is very similar to supply chain management (see page 24) with its emphasis on pull (see page 27) for product movement. Lean is a key tool to identifying and reducing unnecessary inventory. k An examination of the entire supply chain distinguishes two major elements: the inbound supply chain from the outbound supply chain in designing and implement- ing the strategy; otherwise the cycle time and resultant inventory become blurred. A further aspect is to develop a multiple transport and stocking programme to reflect the segmentation of the inventory. Companies that have supply chain management as part of the core competency and strategic focus perform better in controlling inventory across the supply chain. l Segmenting inventory by velocity and profitability identifies where the inventory exists, why it exists and how it occurs. m An important focus of inventory strategy is to make it a key area in the overall company direction with emphasis on customers, sales and profits. n To formulate and implement a sales and operations planning programme that embraces both the customer and sourcing strategies. o To continuously strive to compress time in the cycle. This embraces focus on uncertainty and inventory buffers that increase the cycle time. Endeavour to reduce the time from the need for inventory until it is sold. This is very important with lead times for critical items especially perishable, fashionable and fast-moving consumer goods (FMCG), and for imports that have long transit times. Compression should occur both internally and externally to the company. p To focus on reliability, which contributes to the brand image. Vagaries in the supply chain compound uncertainty and increase inventory. q Innovation and creative thinking is often obtained by brainstorming. Do not imitate other companies’ practices, and do not be restrained by existing company practices and rules that were developed in a different business environment. Brainstorming must not be confined to middle and senior managers/directors, but throughout the company, especially more recent recruits – fresh from college/university – who have been trained in logistics. r Distribution network. The location of the warehouses may have been established years ago under economic conditions that have changed. Their design, layout, often favours a labour-intensive operation and out-of-date transport resource. Many warehouses can increase the total inventory carried because of the extra safety stock. Too few can mean longer transport distances and can have more inventories in transit than on the shelves. Many factors contribute to the location of the ware- house/distribution centre (see page 87). It differs widely in developed countries such as the US and the EU with a good transport infrastructure, as found in France, the Netherlands, Belgium and Germany, and less developed regions as found in many African countries. It also applies in India (see page 137) and Sri Lanka (see page 141). The optimal network for today’s business should determine the warehouse location and future needs. s Supplier performance is a key part of the inventory management and of the sourcing strategy. Manage purchase orders at all stages of the procurement process, including the supply chain transparency. There is much more to consider than low prices in rent or selection. t The effect of global sourcing – long transit times across the Pacific or Atlantic and other trade lands affect the inventories that firms may carry. Analyse the impact

Factors and Challenges Driving Logistics and Supply Chain Management 21 of such sourcing and determine how to address the inventory and degree of competitiveness, especially in the area of pricing. Study the Dyson case study (see page 151) relative to the relocation of the production plant of domestic appli- ances such as washing machines, vacuum cleaners, etc. from England to the Far East – closer to the component sourcing and nearer to the growth markets in the region, including Japan. u Outside assistance embracing two options. First, there is the one-time help that can be provided by a supply chain management consulting firm. Secondly, there is the ongoing approach that can be provided by a 4PL or 3PL to manage the inbound or outbound supply chain. The 4PL should be a neutral party whose focus is supply chain management and does not bring a possible ‘conflict of interest’ by wanting the firm’s freight or warehouse activity that some 3PLs do. Third-party logistics and 4PLs that can see the supply chain, not just freight or pallets, can be valuable part- ners. Increasing inventory turns and velocity is critical to business profitability and survival. Reducing inventory and preventing build-up of unnecessary inventory is not a quick fix. v E-commerce. The need to have adequate software in the warehouse is essential, especially bar coding/radio frequency identification (see page 118). It ensures the development of a computer-literate management system and focus. This facilitates planning and especially the interface with the supply chain management. Management of the inventory should be part of the overall company strategy with focus on customers, sales and profits. It requires commitment and vision. Moreover, it involves all levels of management and constant brainstorming to improve performance. Factors Contributing to the Development of Logistics The factors influencing the development of global logistics are numerous. The most salient are detailed below. 1 The development of information technology (IT). RFID has enabled a transform- ation to take place in communication and data transmission, opening up markets and refocusing strategies in distribution and manufacturing outsourcing and assembly. It has no culture or language barriers, no time zones and is available continuously, bringing together the low- and high-labour cost nations and their skills for the exchange of goods and services. 2 The globalisation of markets with their infrastructure and international trade environment generating business confidence internationally. A major contributor is the WTO (see page 120). 3 The accelerating development of the global container network has offered a new challenge to the global trader. It has placed a fresh focus on global distribution with an emphasis on added value in the distribution chain. The question posed by the international entrepreneur is how can we further improve and extend the con- ventional multi-modal container service to the benefit of the shipper and in the interest of efficiency. Shippers are already being offered the option of independent software and systems as an alternative to those available from the carrier. This allows suppliers, carriers, manufacturers and retailers to make optimum routing decisions and increases the transparency of goods flows. The financial efficiency of the supply chain network is also being examined. This involves developing a product to

22 Factors and Challenges Driving Logistics and Supply Chain Management coordinate the flow of funds more efficiently with the movement of goods, thereby allowing the importer and exporter access to cheaper sources of money. 4 The continuous expansion of the integrators TNT and DHL. This has opened up new markets in both the manufacturing and service industries. 5 The decline of the end-to-end/port-to-port liner conference system and the devel- opment of the hub and spoke global container network (see page 79), coupled with the expansion of multi-modalism. 6 The emergence of the mega-container operator (see page 156), which exploits the economies of scale and provides the mega-operator the opportunity to provide the ‘in-house’ global logistics resources such as are found in mega-container operators. 7 The decline of the freight forwarder has emerged as the mega container carriers develop in-house global logistic operations. This has encouraged the trade to entrust the entire distribution arrangement to the shipowner, thereby bypassing the freight forwarder. 8 The development of the free port, free trade zones and distriparks (see page 79) in the port environs has opened up new opportunities of trade distribution for the international entrepreneur. Such designated areas are immune from customs examination and revenue collection until they enter the domestic market in question. They enable the global trader to outsource the product and focus on such areas as the component assembly point, the packaging and distribution point, and the mixing and blending unit for powdered cargoes such as spices. 9 Value is added to the product through the global logistic network. It may be through better packaging arrangements, more outsourcing of componentised pro- ducts that offer lower costs and better quality, or through the blending and mixing of food products as found in the distriparks in the Port of Rotterdam. 10 Companies, particularly multinationals, are being driven by their logistics depart- ments. Moreover, the multinationals now focus on a simultaneous global product launch across all markets to ensure an early cash return on capital expenditure rather than concentrating on a regional launch over a period of time, for example, phase one Europe, phase two North America and phase three the Far East. This favours the logistic operation. 11 Following on from point 10 is the intense competition emerging in the global product market. Hence, to remain competitive the trader must adopt a global logistic strategy. 12 Satellite production demands a logistic network. It is computer-driven. 13 Shorter product lifecycle, driven by a fashion-conscious international market and continuous technical advancement, favours logistic efficiency. 14 The ongoing technological developments providing a longer shelf life for many consumer products, especially foodstuffs, need a logistically based distribution sourcing mechanism. 15 The global logistic facility offers a one-stop operation and the opportunity to deal with one person – the account executive. Hence, both the importer and exporter develop empathy with the global logistics operator on a tailor-made basis, taking full advantage of their professionalism and experience coupled with a competitively priced operation. Traders can therefore concentrate on their core business of market- ing, product development, investment and production. 16 The global logistics operation encourages the rationalisation of distribution net- works. This will accelerate as the hub and spoke system develops through the megacarrier operations. 17 Continuing improvements in the global infrastructure, for example port modernisa-

Factors and Challenges Driving Logistics and Supply Chain Management 23 tion, the development of inland clearance depots and free trade zones, the provision of new and enlarged airports, the development of road and rail networks, serving the ports and airports, all favour the global logistics operation. The development of multi-modalism involving a stronger interface and integration between transport modes and the emergence of dedicated services also favours global logistics. 18 Undoubtedly, the rapid expansion of IT has been a major driving factor as the global logistic operation is computer-driven. 19 Companies today demand responsiveness from the global operator. The discerning international entrepreneur is demanding the ‘total logistics product service’ (see item 17). When a trader purchases a service, the trader expects the consignment to be delivered or to be informed of delays or challenges encountered. As trade expands and companies move from a regional to a global market basis to exploit the economies of scale, to remain competitive in price and product specification, and to make further market penetration, the quality of the service becomes paramount. Moreover, the global logistics operator, through experience and professionalism, facilitates the trader’s expansion from a regional to a global market base. The global operator will be able to help the trader in planning such market expansion and provide data on the culture, the market environment, import restrictions, customs regulations and the best-practice global logistics operation feasible. Today, traders are logistically literate and demand accreditation to product quality control – which includes distribution through global logistics. Moreover, traders demand a quick response to changing and volatile order levels with cycles of peaks and troughs. Again, the mega-logistic carrier can best respond to such a challenge. 20 Market research confirms that only 30 per cent of changes in suppliers are motivated by a better or cheaper product. Most changes occur due to a poor service quality or inadequate attention to the individual customer. This also favours the mega-logistics global operator. 21 The manufacturer/producer striving to achieve a shorter production cycle realised with the facilitation of many of the ingredients offered by the logistics system. 22 The development of 3PL contractors such as Wincanton Logistics and Exel Logistics. 23 The continuous improvement in supply chain software. The most important concept underlying management of supply is that of integration. This embraces manufactur- ing resource planning, inventory management and supply chain design. Goods must be able to flow in a highly organised manner between each stage of the supply chain while at the same time achieving the most desirable balance between sales–stocks– production and customer services–cost–working capital. Every supply chain will have a different set of emphases. For example, a manufacturer of high specification value goods may be more interested in speed and security of delivery than achieving the lowest cost. It is essential all parties involved in the supply chain have an agreed set of priorities. Moreover, effective transparent communication and understanding needs to be created of what the supply chain is designed to achieve. Logistic systems are important to be able to send data to where the decisions are taken and to keep all the international business managers and sectors informed about the flow of goods. Figure 2.2 features the supply chain software. Software advances have been acceler- ated through the rapid globalisation of manufacture and distribution. 24 The development of time-sharing with the logistics contractor. This involves the contractor being linked to the customer’s own IT system – receiving order picking and delivery instructions, implementing them and feeding back the results for

24 Factors and Challenges Driving Logistics and Supply Chain Management Figure 2.2 A focus of the supply chain software. Reproduced by courtesy of Synquest. processing and evaluation. However, this limits their ability to take a proactive approach to their customer’s needs. 25 Economic and trading blocs as found in Europe, North America and the Far East are continuing to develop as Member States realise their benefits. Such blocs favour particularly the global logistic trader who can adopt the strategy of selling a single product in a single market, such as the EU, which has no culture or trade barriers and permits the free flow of goods. Supply chain efficiency is here a key factor in sales performance and market penetration. To conclude our analysis the specific reasons for the increasing interest in supply chain management and global logistics can be summarised as follows: 1 Concept. Companies are primarily concerned with reducing delivery times and improving responsiveness to customers, reflecting the shorter product lifecycles they face. 2 Value. Equal emphasis is placed upon cost savings (from reduced inventory levels, economies of sale and a reduction in fixed assets) and improved service quality (through reliable delivery, improved stock availability and response times). To achieve improvements in the management of a supply chain, keeping track of goods at all times is the key. This can be achieved through manual methods or sophisticated electronic data interchange (EDI) tools (see page 114). Asset Management in the Supply Chain Asset management is a key area in the global supply chain and warehouse management. It is very much aligned to radio frequency identification (RFID) (see page 108). Overall,

Factors and Challenges Driving Logistics and Supply Chain Management 25 it provides a range of benefits in inventory control, asset utilisation, manufacturing work-in-process, loss prevention and security. The asset management problem – it emerges with many industries conducting and keeping up with existing inventory – has historically been a challenging, resource- intensive process. Many conduct a resource and fiscal decision without having accurate current data available. Many current methods for performing an inventory count or for tracking asset movement do not provide real-time asset visibility. Hence, decisions are based on outdated, inaccurate information. One must acknowledge that in the most advanced supply chain management, warehouse management systems, enterprise resource planning and related software solutions, the accuracy and value of the data from these packages is only as good as the information source input. Equally challenging is the equipment and asset monitoring to prevent theft or mis- placement. Hence the results that the asset is no longer available and the company will incur additional cost to replace it. Endless situations arise of asset loss, such as the hotel that lost hundreds of television sets from their own shipping docks, the manufacturer that was to have much of its electronic equipment stolen via employee exits or shipping docks, or the laboratory unable to locate a piece of test equipment, but later found it locked away in a forgotten storage room. Being able to detect a potential theft before it happens, or locating critical equipment when needed, requires real-time visibility and information relating to the location and status of the item. Additionally, that informa- tion must be integrated into the existing host systems so that decisions and actions can be taken in real time. Security is another area on which to focus attention. Consideration must be given to monitor security personnel; in the event that assistance is needed at a specific location within a facility, the nearest individual can be called upon. An analysis of the foregoing identifies three key areas: real-time visibility; movement, status or tamper detection; and integration into high-level solutions. This requires a facility to address these areas as found in Red Priarie DL × ® Mobile Resource Man- agement (MRM) software. It is used in conjunction with data capture hardware such as RFID – (active or passive), bar code or global positioning system (GPS); it provides real-time visibility to assets at the site or enterprise level. The system operates on the basis of the foundation for a data capture ecosystem. It allows users to integrate a variety of data collection mechanisms, embracing the best technology for a given class of assets while maintaining a single, comprehensive data collection exchange and reporting structure. The managing mobile resource solution is capable of providing a complete solution for the improved management of mobile resources and assets inherent in the supply chain such as pallets, containers, totes, equipment and vehicles. Running as a thin client application (most of software resides on network as opposed to PC, that is, web- deployed applications), the solution has the ability to provide the following: (a) real-time location of any mobile resources; (b) current status and life history of assets; (c) auto- matic user-definable warnings and alerts; (d) monitoring and enforcement of service schedules; (e) tracking of assets through manufacturing or repair cycles; (f) simple and effective exporting to Excel and Word; (g) performance monitoring; and (h) comprehen- sive management information and dashboard. The mechanism procedure of RFID embraces tags placed on assets to be monitored. Depending on the asset type and application requirements, the tags may be active or passive RFID. Active tags have a battery, beacon, on a periodic basis, and can be read from distances of several hundred feet depending on the antenna type and surrounding

26 Factors and Challenges Driving Logistics and Supply Chain Management environment. Passive tags derive their power when they are within the field of the reader. While they are considerably less expensive than active RFID tags, they have considerably less read range capability, with most having maximum read ranges of 10 feet or less. This limitation may require maximising the tags’ readability by placing it on the asset where it is more susceptible to damage from moving equipment. Because of the differences in cost and read ranges, care must be taken and time invested to choose the proper tag for the application. The area to be monitored is divided into zones with a reader placed in each zone such that when a tag is seen by a reader, its location is known, based on the zone definition. Resolution for the zones can vary based on the asset being tagged, antenna type and composition of the surrounding environment. In a passive RFID application, portals would be set up at the entrances and exits to a given area, such that the tagged asset can only enter or leave the area by passing within the field of the reader. Additionally, bar-code readers could be used to capture asset information and provide this to the system via the MRM software. This assumes that a bar code is placed on each asset and the operation or process provides means for manual scanning of the bar code. An example of asset management arises in the manufacturing sector in North America, embracing seven locations. The manufacturing process is highly automated and high-tech. Hitherto, it was reliant on manual bar-code scans or manual entries into logs. At certain steps in the process, assembly workers and/or automation tools need to know which unit is being worked on, so the correct function or process step is performed. To resolve the problem, tags were placed on units being assembled and readers placed at key work cells along the assembly line; when a tag is read, the MRM software interprets which unit is identified at that work cell. It then interacts with the customer’s host system, updating the location of other tagged units in the flow using sequencing logic. This information is subsequently shared with other systems in the operation and made available and transmittable via web browser, report or alert. Subsequently, the RFID was used to track totes used to transport parts and tools, and monitor and locate vehicles moving within the facility. A further example arises with reusable container tracking. A leading manufacturer of residential glass uses metal racks to transport sheets of glass within the facility and for shipping to window manufacturers. The racks are often moved between the manu- facturer’s various facilities as they are returned from the window manufacturers. The glass manufacturer has a problem maintaining visibility to the racks inasmuch as they can only account for a percentage of the racks and do not know how many reside at their manufacturing or customer locations. This generates a problem, as individual sites may not have enough racks on hand to support customer orders, impacting the sales cycle and ultimately revenue. Moreover, it contributes to excess inventory as more are purchased to meet demand because of misplaced racks. To resolve the problem, RFID tags are placed on each rack and readers placed at each dock door. The MRM software is used to provide visibility to the tagged racks as they move into and out of the manufacturer’s facilities. The MRM software is integrated into the manufacturer’s host systems so that this information can be shared across the enter- prise, allowing total visibility to all racks and providing a means for them to make better decisions as they manage incoming orders. To conclude, active RFID (see page 108) is not a panacea for all asset types or applica- tions. Alternatively, the passive RFID bar code or global positioning systems (GPS) may

Factors and Challenges Driving Logistics and Supply Chain Management 27 be needed. The ideal asset management system must make use of multiple technologies, choosing the best data capture solution for each type of asset. This could result in using a combination of bar-code labels, passive RFID, active RFID and GPS, thereby taking advantage of the strengths of each for certain asset types. Lean Supply Chain Management Lean supply chain management is the strategic process of developing and managing a cost-effective and efficient supply chain that is competitive in the global marketplace and has a strong empathy with the end user. It involves the ability to identify waste in the supply chain. Overall it focuses on three key areas. Basically, it extends beyond the supply chain and manufacturing programme, but includes a change throughout the organisation to be logistically focused and literate. Secondly, it embraces the suppliers and customers. Thirdly, the lean principles that must be the basis of the lean supply chain: determine value from the view of the customer, not the view of the company, make the product and information flow, a pull product (see page 14) strategy, do not push it, and manage towards perfection with continuous improvement. Lean supply chain management is a challenge that must be acknowledged. This is in addition to the usual company issues, such as lack of implementation know-how, resist- ance to change, lack of a crisis to create urgency, gaining resources and commitment and backsliding. Areas that need to be addressed include the following: a International sourcing – procuring finished goods or raw materials in China, India, Germany, Brazil and elsewhere creates a significant obstacle to lean, especially outside North America. The order to delivery time is long. Time is a waste/ uneconomic resource, and it compounds the inventory waste issue by making firms buffer (carry additional stocks), and carry more inventory than is needed to compensate for the time being lean, with a 20–40-day transit time bringing a unique test to develop lean SCM. It is compounded when experiencing port delays and shortage of specialised containers. b Accounting – does not recognise waste as lean does. The need to have continuous financial evaluation and added value identity/opportunities is essential. Inventory represents capital tied up. Accounting systems do not recognise time, particularly in the balance sheet. Rework is not treated the same by accounting. c Organisation – supply chain management and lean are processes that cross organisa- tion boundaries. Implementing a process that goes horizontally in a vertically and functionally defined organisation creates gaps in both processes. These gaps create areas where waste can develop and where removing it can be difficult, especially with MNIs who follow a corporate strategy. d Number of firms. There are many suppliers and many logistic service providers in a supply chain. Some are visible and some are less visible. Many suppliers or logistics services do not practice a lean strategy. Adopting a lean strategy outside the company into other firms adds to the time and complexity of implementing and becoming lean. Adopting a lean strategy requires a plan with an objective/strategic focus and that is pragmatic/professional/flexible. This involves evaluating all the ingredients of the supply chain and measuring each element against a benchmark. A key to the plan is the starting point. Overall, a useful tool is the value stream mapping (VSM), which defines the

28 Factors and Challenges Driving Logistics and Supply Chain Management current state of a company’s support chain, to identify waste and to lay the foundation in determining its future state flow. Initial VSM efforts include defining the present value stream for product families, those that share common operations or have large volume impact, either in units or currency value. Formulating the supply chain embraces featuring the various lean tools in the future supply chain flow. This features the infrastructure to support it, training, culture, quality methods, accounting systems and investment policies. Lean tools have differences as to ease of use, time to implement, benefits and risk. It embraces six stages. a 5 Ss – sort, straighten, sweep/shine, standardise, sustain/self-discipline. This is a visual way to organise waste removal with extra time for travel or employees. It can be used in distribution centres and in offices. b Rapid set-up – or changeover – has application in the warehouse to adjust layout for seasonal products, new products and changes in which products are fast-moving and often picked, and the complementary items that go with these fast-overs. Reducing the time can involve housekeeping and maintenance (including 5 Ss), set- ting up smaller areas for stock-keeping units (SKUs), technology (such as warehouse management systems) and RFID (see page 108)). c Standardise – involves efficient work processes that are repeatedly followed to define who, what, how, where and when. This helps firms synchronise the time required to pull and ship all the orders and actual time to do this (cycle time). It can be the basis for employee training. d Kanban – present a new, unique way to view ‘warehousing’ and inventory posi- tioning. A way to coordinate multi-step processes for multiple products. With Kanban, small stocks of inventory are placed in dedicated locations for supply chain control. This approach runs counter to the traditional way of large distribution centres delivering truckloads of products to stores or customers. Instead, mini ‘warehouses’ are used to position inventory closer to the customer and increase the speed of delivery and inventory turns. Point of sale and other technologies can be the withdrawal signal to trigger both drawing from and replenishing Kanbans. Items placed in supply chain Kanbans could be limited to high inventory such as ‘A’ items and then using regular warehouses for ‘B’ and ‘C’ items. A variation to Kanban is with the import supply chains and differentiating ‘A’ versus ‘B’ versus ‘C’ items, and using faster mode and faster carrier transit methods for select items. This reduces time and inventory with small batch sizes for select items. All inventories are not treated the same way from suppliers nor with regard to warehousing. e Workcell – can be defined as a unit larger than an individual operation, but smaller than a department. It is self-contained as to equipment and resources. The potential application, combining multi-operations into a central area, exist where warehouses carry out additional activities such as kitting or assembly. f Sigma – an advanced tool that ties to quality. The focus is variation and controlling and preventing errors. Statistical measurement is fundamental. It is used through- out the supply chain, not just in select activities or locations. Sigma takes lean supply chain management to its ultimate level. Usually, there are complementary or supporting processes with lean supply chain man- agement. The additional processes may include ‘strategic sourcing’ to manage supplier performance for critical and important items; ‘strategic customer’ to gain the needed

Factors and Challenges Driving Logistics and Supply Chain Management 29 viewpoint of key customers; and ‘sales and operations planning’ to blend the strategic sourcing and customer with the tactical day-to-day supply chain management. Overall, lean supply chain management involves continuous focus and flexibility in all areas of the business. It requires a dedicated team to achieve the objective and critical analysis of all areas of the supply chain to improve efficiency and add value to the supply chain. Multi-sourcing yields improvement, but adds to the complexity of the supply chain operation/management. Essentially, the operation must remain seamless throughout. A strategic focus is required. Getting started with lean and sustaining it with continuous improvement is not easy. Lean takes time and years to accomplish. Often the waste has become incorporated into the daily operation company-wide and is accepted as part of doing business. In some situations there may be too much instability in a supply chain to become lean. The first step is to increase stability before beginning lean. Overall, the benefits are intrinsic, embracing gaining market share, reducing capital tied up in inventory, increasing profit- ability, improving customer service, increasing capacity and taking time out of the entire company’s way of doing things – a management culture change. Planning is an essential ingredient. Lean Supply Workforce We have examined lean supply chain management (see page 27) and will examine the demand-driven workforce (see page 101), embracing the demand-driven supply network, incorporating the pull model as distinct from the push model. We will now examine the concept of lean supply workforce. These are all interrelated. Lean supply workforce traces its history/conception to the Japanese car producer Toyota, which extolled a highly efficient manufacturing workflow process. Its objective is to remove waste from the workflow processes. Today it has become translated into the logistic framework and is found in the global supply chain. It adds value to the supply chain and eliminates waste from the time the order is placed, to the delivery process/end user. Areas on which to focus include unproductive work methods, non-productive or indirect time, and a range of other work habits and conditions – many of which are historical – that don’t add value. Taiichi Ohno – the Toyota production engineer – who developed the idea, identified seven areas on which to focus, which we will now examine briefly: a The first objective is to adopt the ‘best practice’ approach and eliminate historical methods, which many labour forces are keen to preserve or even modify. b The next stage is to set goals, standards and adaptable precision. This embraces using the most efficient methods as defined by the best practice. A useful technique is engineered labour standards developed using time studies, an established database of granular movements called master standards data, or a combination of both. These examine individual jobs based on the work content to define an appropriate length of time for each task that reflects weight, cube and dimensions of the product, the equipment used and the distance travelled. Overall, the operations must reflect current and future trends, gain labour force acceptance, and strive towards accuracy, fairness and productivity. It should be noted that historical averages should not be used as they do not reflect best practices and above all do not account for variances in job content. c The third element is planning, scheduling and simulation. This embraces the

30 Factors and Challenges Driving Logistics and Supply Chain Management prerequisite to have in place the best practice and creation of accurate standards, which facilitate how long a given job should take or the required number of work- force to undertake a particular job. Technology is available to translate order demand data, seasonal trends, special promotions, and other demand signals into workforce plans that indicate how many people, with what skills, are required to complete the prescribed work within a given time frame such as a shift, day, week or longer period. This planning data can be combined with human resource data on skills, severity, preferred shift or workdays, hours worked in the pay periods, employment regulation (see page 63) and other pertinent information to develop proper staffing schedules. This strategy will eliminate the waste associated with over- staffing or unnecessary overtime or temporary help. A further benefit of understand- ing work content and time frames is the ability to evaluate the impact of changes on work methods, equipment or layout, and calculate the return on investment (ROI) for these changes. d An area where waste can be identified is unproductive time embracing time spent between jobs or indirect time. e Quality and safety are key factors to establish best practices. This is realised through employed best-practice methodologies, training workers and supervisors how to properly use the best practices, and by removing barriers to productivity. Workers will try to cut corners to improve their productivity performance, but the cost of mistakes and accidents that ensue, including damaged inventory and equipment, injuries, penalties, returns and other customer service issues, can far outweigh the savings from productivity gains. f Educating the workforce in the logistic skills to develop best practice is a key area. This includes not only the initial course programme, but also refresher courses. Continuous training must be given by supervisors to ensure the goals are realised. Overall, the training must be professional and pragmatic and with a view to per- formance monitoring and coaching. g The management must have regular meaningful data to measure the workforce productivity and reliability. This involves a range of analytical tools that will identify problem areas and groups that are high or low performers. For example, it may identify areas of investment, training and changes in the workforce. Companies focusing on the lean supply workforce strategy frequently devise incentive schemes. This requires accurate performance data. Finally, in our lean supply workforce analysis, companies frequently experience a reluctance to change, but in most situations the option does not exist if the company and its products are to remain competitive. The driving force is often technology. The follow- ing points can be deployed to persuade the workforce/management of the benefits emerging. i Modelling and simulation tools enable management to evaluate the true cost of changes to methodologies, equipment, or layout in order to calculate ROI. ii Proper workforce planning and scheduling reduces overstaffing, overtime and temporary staff. iii It develops a logistic culture focused on efficiency – particularly cost-consciousness. iv Transformation to a self-accountability culture eliminates cherry-picking and other work avoidance activities. This improves productivity and morale, since all workers are evaluated fairly and equitably.

Factors and Challenges Driving Logistics and Supply Chain Management 31 v Elimination of wasted time and effort improves productivity and throughput, thus reducing costs and improving service. vi Employment of best practices not only ensures that the most efficient, safe and error-free methodologies are used, it makes operations more consistent. This reduces training cost, improves quality, and enhances customer service. vii Self-motivated and accountable workers with higher morale will provide better, more friendly and responsive customer service. This improves customer satisfaction and loyalty. viii The collaborative partnership established in a performance-focused culture improves the morale and retention of the labour force. Overall, the benefits can significantly impact bottom-line results. ix The use of granular standards and discrete measurement software enables activity- based costing. This helps management to better understand the cost to serve each customer by product or service provided. This data can be very helpful in bidding and price negotiations, as well as in determining true margin contributions by product, customer service, location or business unit. To conclude, our lean workforce analysis is the result of the twenty-first century strive (see page 29) for improved and continuous productivity in all sectors of the business community. It generates a situation where workers are self-motivated and self-accountable, supervisors become coaches, and the management has a more produc- tive workforce with higher esteem and retention qualities. It requires the skill of managing change encapsulated through training, involvement and financial incentive. Useful Sources of Information Chartered Institute of Logistics and Transport <www.ciltuk.org.uk> GAC Logistics <www.gacworld.com>

Chapter 3 Export Sales Contract Introduction The formulation of the export sales contract represents the conclusion of some possibly difficult negotiations and accordingly particular care should be taken regarding the preparation of its terms. It must be borne in mind that an exporter’s primary task is to sell his or her products at a profit and therefore the contract should fulfil this objective insofar as his or her obligations are concerned. Above all, it should be capable of being executed under reasonable circumstances and ultimately produce a modest profit. Full cognisance must be taken of logistics and the supply chain. Market Environment Today, conducting business overseas is logistically driven. Hence, the need to conduct adequate research to ensure the logistic entrepreneur company is compatible with the buyer organization and thereby ensure there is an efficient supply chain on which both parties can build on to conduct business. The following points are relevant: a Who are the main players in the market and what is their profile? b Market access and legal/political constraints. c Market stability and its infrastructure. d Product availability and its stage of development. It may be the first or second stage of development – low- or high-tech. It is also added value in terms of its develop- ment. Countries like India (see page 33), Pakistan, China and Sri Lanka (see page 141) are moving from a low-tech to a high-tech environment in many industrial and sociably developed regions with a logistics focus and continuous investment in the logistic infrastructure. e Is the market computer and logistically literate, and are importers/buyers flexible and adaptable? f Exchange rate stability and importation cost such as import duty (see page 117), sea/airport charges, and sales tax. g Membership of economic or trading bloc. Excellent example found in EU – 27 Member States – good infrastructure – single market permitting distribution of goods without border controls embracing customs duty and above all, high-tech and logistically focused (see page 133). North America is likewise logistically focused (see page 136). h Whether market is fully developed, underdeveloped, or developing. Fully developed

Export Sales Contract 33 are high-tech, capital-intensive with fully trained workforce. Conversely the less developed countries (LDCs) are agriculturally driven and often a commodity- focused economy with low labour costs and low levels of technology. Moreover, they rely on non-convertible currencies. i Opportunity for inwards investment embracing joint venture, licensing, franchise, mergers and acquisition or industrial transplant. j Perceived benefits of the market such as indigenous resources, strategic geographical location etc. Market Entry Strategy Companies must have a logistic strategic focus in their decision-making process of select- ing and entering a market, a series of markets, or cluster markets. The following logistic strategic considerations are relevant: a To have a customer portfolio with an international base. b To increase production thereby lowering unit cost and permitting more competitive pricing. c To raise the company profile to attract more capital into the company and provide more funds for new technology. d To realise a more volume-based and productive utilisation of the company infra- structure and its logistics/supply chain. e To increase market share and dominance. f To increase general competitiveness of the company. g To ensure the long-term future of the company. h To develop a proactive, rather than a reactive, company, which is globally logistically focused and market research-driven, with a continuous focus on client base and marketplace environment. i To develop an international brand image. Many companies tend to develop/target a cluster market concept, each of which is logistically focused and thereby reliant on a distribution centre in one country served by reliable supply chains in neighbouring countries. It also favours a volume market with the opportunity for more productivity and logistic development. Basically, the role of logistics is the development of systems and supporting coordin- ation processes to ensure the customers’ aspirations are met. Planning is an essential factor with well-thought-out and designed logistic systems. Overall, it embraces three basic areas. The first is to identify customer service needs. The key components and the prefer- ences must be identified. Reliability, cost of service, value added, and performance are key areas. Cluster customer markets of similar service preferences are ideal. The second is to define customer service objectives. It is a market-driven logistics strategy. This embraces a zero failure rate. This is more difficult to realise with a global supply chain involving the complexity of international regulations compared with a national supply chain operating exclusively in one country such as the USA, Germany, or China. The global supply chain is likely to involve 3PLs and 4PLs, customs duty, differ- ing transport modes, a variety of international trade regulations crossing international boundaries, Incoterms 2000 (see page 46), UCP 600 (see page 52) packaging regula- tions, products specification, various cultures, differing currencies, etc. It is a challenging

34 Export Sales Contract operation that the global logistics entrepreneur must overcome. A development in the twenty-first century is tracking, whereby mega-container operators are able, through satellite communications INMARSAT (see page 145), to locate for the customer the whereabouts of the consignment in its international transit and anticipated arrival time at the destination. Software is a key factor in the design of the global logistic system and enables, through e-commerce, continuous communication such as RFID (see page 108). The cost benefit of the customer service will be explored in greater depth in chapter 3, but a number of salient points are very significant, which we will briefly examine. The first stage is to identify the profitability emerging from individual customers. High- volume customers generate substantial profits, but lower unit cost. The second aspect is to continuously examine ways of reducing cost in the supply chain compatible with providing an acceptable service to the client. This is an important area in global logistics as international transport operators are continuously remodelling their services to become more competitive in transit time. The ‘hub and spoke’ system in a container operation is an example. Finally, the credit rating of the customer must be sought, engaging Standard & Poors of Stockhom (see page 126), and the country risk as available from Dun & Bradstreet, which monitors country risk (see page 56). Constituents of the Export Sales Contract The formulation and execution of the export sales contract involves four elements – insurance of the goods, payment of the goods, the contract of carriage and the export sales contract. All are interrelated and are primarily based on the global logistic oper- ation and the related documentation. This embraces the cargo insurance certificate, the contract of carriage found in a bill of lading, air waybill or consignment, the payment arrangements involving presentation of the bill of lading to the bank to confirm ship- ment of the goods, and the export sales contract identifying the foregoing arrangements on a timescale basis. There are numerous variations to the foregoing arrangements (see page 79), which provide the logistics operator the ability to reduce cost, improve produc- tivity and above all improve service and competiveness to the customer. The key to it is to fully understand the international trade environment embraced in the supply chain and have complete transparency with all the contributors/participants in the supply chain. This embraces credit rating, risk area, customs, routing, payment arrangements, pack- aging, transport cost, Incoterms, warehouse management, distribution centres, currency, 3PLs, 4PLs, software, insurance and product specification. A system of checkpoints to develop a cost benefit strategy to the supplier/consumer is an effective way of developing an efficient supply chain. Details of an export contract are given below: a Exporter’s (seller’s) registered name and address. b Importer’s (buyer’s) registered name and address. c Short title of each party quoted in a and b. d Purpose of contract – the specified merchandise sold by person in item a to addressee quoted in item b. e Number and quantity of goods, precisely and fully described. In particular the contract must mention details of any batches and reconcile goods descriptions with custom tariff description (see page 74). f The price. The currency selected must be stable and convertible (see page 52). It may be in the seller’s or buyer’s currency or third currency acceptable to both parties. The

Export Sales Contract 35 seller’s currency transfers the risk of variation to the buyer; conversely the buyer’s currency risk rests with the seller, while the third currency shares the currency risk variation between seller and buyer. g Terms of delivery. It is important that the correct Incoterm 2000 (see page 50) is used and the supply chain management keeps it under continuous review. h Terms of payment, for example open account, cash with order, letter of credit, open account or documents, against payment or acceptance. Again, salient factor in the design of the supply chain. i Delivery date and shipment date or period. This is a critical area with item j and has a strong interface with international transport operation (see page 79). j Methods of shipment – container, Ro/Ro, air freight or multi-modal road/container/ rail/air. k Method of packing. Both parties must be fully aware and agree on packing specifica- tion. Skilful packing can improve the load-ability of the cargo unit/container/hand- ling. Stringent regulations apply to dangerous classified cargo shipments (see page 86). l Cargo insurance policy/terms. The option exists for the seller/buyer to undertake the insurance and depends on the Incoterm 2000 (see page 50). m Import or export licence details or other instructions. The period of their validity must be reconciled with the terms of payment and delivery date or shipment date or period. There is a zero tolerance with the import/export licence extension, which the logistic operator must acknowledge. n Shipping, freight and documentary requirements and/or instructions. This includes marking of cargo. A complex area that the logistic operator must be familiar with. This includes pre-shipment documentation (see page 83). o Contract conditions, for example sale, delivery, performance (quality) of goods, arbitration, security, etc. This embraces local conditions that will vary with overseas destinations, especially customs clearance (see page 78). p Signature. Both parties must ensure that a responsible person at director or manager- ial level signs the contract and the data should be recorded. Obviously the terms of the export sales contract will vary by circumstance and must be driven by logistics strategy. It may feature agency involvement, after-sales activities such as the availability and supply of spares, product servicing, training, advertising and promotion cost, and so on. It may embrace outsourcing of components and third- country assembly, embracing inbound and outbound movement. The logistics operator must minimise any risk areas such as political situation, currency fluctuations, unreliable transit schedules, protracted customs clearance, excessive documentation to effect cus- toms clearance, liquidation of the buyer, and absence of adequate software in the supply chain management. Usually, the documents (item h) will be electronically transmitted, feature a performance bond, and the contract is subject to English law, or the national sovereignty of the buyer’s/seller’s country and an arbitration clause. Each party of the contract must retain a copy. A sound logistic management strategy is required and full use must be made of com- puterisation. The tactics adopted include the strategy required for continuous review in the light of changing marketing conditions. Five areas need special attention: cash flow, administration, insurance, risk areas and total cost. The foregoing embraces: (a) cash flow and the payment cycle and the options available to speed up payment through factoring (see page 51); (b) administration/supply chain